The BUBBLE that hasn’t fully burst: “America Goes Dark”

As local Pollyannas dance around the “we need 2,400 acres of urban reserves/we need a Taj Mahal new school building that we’ll grow into/TEAM will lead us to economic Nirvana” Maypole, I read the facts. There is not a “growth” Maypole to dance around anywhere in Oregon –  and the facts about the giant gulf building between fulfilling basic needs in face of  the sinking economy can’t be refuted. (Stay tuned for a critique of the Molalla River School District’s noxious middle school PUSH POLL: questions and results were just wrenched from the unwilling clutches of Supertinendent Kostur after he was taught a lesson about what  “PUBLIC”  in “public information” means!).

The housing market was Molalla’s artificial balloon which created a false economy.  At Zillow, every city is listed with charts about the state of the city’s housing market, the distance working people must commute, the median wage per family, and a pie chart with the number of families in the area with children.

In Molalla, in an era of peak oil and an awakening understanding that people want quality, well-rounded communities, facts don’t lie:

Almost 63% of the families here have no children in school.

The median family wage in Molalla has fallen to $42,672 – LESS than the nationwide median wage of $44.512.

Home values have fallen to an average not seen since before 2006: The average sales price here is about $188,000.

Most telling is the time Molalla area residents must spend commuting (remember PEAK OIL?): Over 55% of Molalla residents must commute 30 minutes OR MORE each way to work. That alone in the current market is a huge turn off – people understand that they can’t afford the commute, no matter how cheap the houses are in Molalla. In the long run, as gas prices rise, people will continue to seek homes closer to core Metro, with its diverse transportation, job, service, and store choices.

It is also fascinating to visit Clackamas County’s election results charts. In recent elections, all bond/money measures were defeated by Molalla area voters, usually by very wide margins.

The 2006 school bond was defeated by 61.61% NO vote (that is interesting since it roughly corresponds to the 63% of households without children in schools in Molalla).

The annexation to North Clackamas Parks District was voted down in 2008 by a 65% NO vote (it would have cost residents both in and out of the city limits).

The wildest vote of all came when the NEVER TO BE SELF SUPPORTING POOL came to district voters asking for an operating bond: District (both sides of the city limits) voters said NO!!!! to the tune of 75.93% (I guess that someone neglected to do a PUSH POLL for that one?). If  City residents wonder why they are stuck forever with the pool surcharge on water bills, remember that NO vote.

Apparently since the City is dumb enough to “own” the loser of a pool, it can’t impose undemocratic surcharges on anyone except residents of the City. Sorry City residents – you are stuck in a place that doesn’t respect democratic process and that NEVER thinks through the consequences of its actions.

Those huge Molalla NO! votes on bonds/operating levies came BEFORE the collapse of the housing market, BEFORE the economy collapsed and BEFORE huge unemployment hit in Oregon.

Voters are learning that “if we build it they will come” is a false premise. The voter approved Wapato Jail in Multnomah County, that sits empty because it could never get voters to approve operating funds, is a great example of the fallacy of getting bonds to build “something” without thinking of what it costs long-term to OPERATE AND MAINTAIN whatever is proposed. The Molalla Pool, the Wapato Jail, new school buildings: They all COST to operate and maintain, and those costs increase over the years.

Again, the City KNEW that the pool would NEVER BE SELF SUPPORTING – so when you pay that extra $5 in the City blame the pool promoters who roped in voters without telling the truth about LONG TERM COSTS.

Read the below FACTS about the state of the real estate market and the state of the economy. The upshot is that the bottom is nowhere in sight. Note that Clackamas County is one of the places that expects to let some County roads revert to gravel – how’s that for a lack of operating revenue?

The first article outlines that about 28% of mortgages are soon to be underwater and what that means to the American economy and to real estate investment. The second, “America Goes Dark” is a quick overview about how OPERATING COSTS in the depression are shutting down government services across America.

Can you see how intertwined these issues are? Americans put their faith in a real estate boom that wasn’t sustainable, and with the economic crash the institutions that depend on tax revenues are now collapsing.

If you build it: “THEY” WON’T COME – and the voters can’t afford to approve taxes  to MAINTAIN “IT” in this depression.


Real Estate: The Worrying Numbers Behind Underwater Homeowners

By CHARLES HUGH SMITH Posted 6:00 AM 08/07/10

By the end of the first quarter of 2010, the number of mortgaged residential properties with negative equity had declined slightly to 11.2 million, down from 11.3 million at the end of 2009, according to a report issued by real estate analytics firm CoreLogic.

The bad news: Those 11.2 million loans make up roughly 24% of all U.S. mortgages. Add the 2.3 million borrowers who are close to slipping underwater (those with less than 5% equity), and the numbers rise to 13.5 million — 28% of mortgages.

This aligns with other industry estimates. Earlier this year, Mark Zandi, chief economist at Moody’s, estimated that roughly 15 million American homeowners owe the bank more than their home is worth.

Calculating how many households are underwater, how far underwater they are and how many others are at risk of sliding into negative equity should housing values decline further is critical to forecasting future foreclosures, a recovery in housing values and the financial health of U.S. households.

Negative Equity Boosts Foreclosure

The data confirms the common-sense expectation that there’s a direct correlation between negative equity and foreclosures: As the number of homeowners who are underwater rises, so do foreclosures.

Many homes are worth only half of their mortgages. There are 4.1 million homeowners with more than 50% negative equity and another 5 million homeowners with 20% to 50% negative equity.

So the majority of the 11.2 million properties with negative equity (9.1 million) are deeply underwater and are thus unlikely to be made whole by modest increases in home prices. That makes further increases in foreclosures likely, and so it’s unsurprising that expects that this year’s foreclosures will swell to 2.4 million.

How Many Homes Could End Up Underwater?

If prices decline into 2011, as some analysts project, how many homes could slip into negative equity?

According to the U.S. Census Bureau, as of 2008, 51 million households had a mortgage, 24 million owned homes free and clear (no mortgage) and about 37 million households rented their homes.

In 2008 and 2009, foreclosures dissolved roughly 4 million mortgages, reducing the total number of outstanding mortgages to around 47 million. The total number of U.S. home-owning households stand at about 71 million.

The data presented by CoreLogic backs up these conclusions:

  • The highest percentage of homes with negative equity are concentrated in the states that experienced the most extreme price increases and the subsequent severe declines in valuations: Nevada, Arizona, Florida and California.
  • Though the media focuses on the “bubble” states, many other states also have high rates of negative equity: Over 20% of homeowners in Virginia, for example, are underwater, and an additional 5.7% are in near-negative equity territory.
  • Properties with more than one mortgage — those with second mortgages or home equity lines of credit (HELOC) on top of first mortgages — were twice as likely to be underwater than those with only a first mortgage (38% vs. 19%).

What is surprising is how few homes have conventional 30-year mortgages that require a down payment. An analysis I performed in 2007 found that only 12 million of the roughly 48 million homes with mortgages had only a conventional fixed 30 year mortgage and no additional liens.

So only 25% of all homes with mortgages had what was once the only loan available, the conventional 30 year fixed mortgage supported by a 20% cash down payment.

The other 75% of mortgaged homes had loans that greatly increased the risk of falling into negative equity or delinquency:

  • “Exotic” subprime loans
  • Adjustable-rate mortgages that can reset to much higher payments after a few years
  • Two mortgages — a first mortgage and a “junior lien” such as a second mortgage or a home equity line of credit (HELOC)

All this suggests that only 25% of mortgages — those with 30 year fixed-rate mortgages — are at low risk of negative equity. The remaining 75% — mortgage holders at higher risk of negative equity or already underwater — number about 35 million households and make up around half of total home-owning households (71 million). Of the 50% of homeowners with risky loans, some 11 million are already underwater.

The Equity Gap

According to the latest Federal Reserve Flow of Funds report, there was $10.24 trillion in U.S. residential mortgages and $16.5 trillion in total home equity.

Since there are about 47 million outstanding mortgages, and 24 millions homes owned free and clear (no mortgage), then we can calculate that free-and-clear owners hold about a third of the $16.5 trillion in home equity — roughly $5.3 trillion. That leaves about $1.2 trillion in equity spread amongst the 47 million homes with mortgages.

Given the likelihood that those with a conventional fixed-rate mortgage are most likely to have substantial equity, then it follows that this $1.2 trillion in equity is concentrated in the 12 million homes with conventional mortgages.

Subtract the 11 million homeowners who are underwater and have no equity, and that suggests that the remaining 25 million homeowners with exotic, adjustable or multiple mortgages have relatively little equity.

A recent analysis of long-term U.S. real estate data concluded that over time, the nation’s housing equity (collateral) can sustain a mortgage load of approximately 40% of total equity. Thus in 1990, $6 trillion of housing collateral supported $2.5 trillion of mortgages, and the $23 trillion of housing collateral in 2006 sustained $10 trillion of mortgages.

Since then, equity has fallen $7 trillion to $16.5 trillion, but mortgages have barely declined — they remain at $10.24 trillion. To revert to the long-term trend, mortgages will have to decline by $4 trillion to about $6 trillion.

The conclusion: Never before have American homeowners with mortgages held such a thin slice of equity, and never before have so many homeowners been at risk of negative equity. Predicting accurately how many homeowners end up underwater is impossible, as the future of home prices is unknown. But anyone claiming that the number of underwater homes can’t rise further is on thin ice.”



Paul Krugman

“The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno.

Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.

And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled; in Hawaii, the school year itself is being drastically shortened. And all signs point to even more cuts ahead.”

(end quote)

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